Supreme Court Upholds Tender Rejection Based on Sister Company’s Adverse Record in Government Contracts (21 June 2019)

Date of the Judgment: 21 June 2019
Citation: The Silppi Constructions Contractors vs. Union of India and Anr. ETC. ETC., Special Leave Petition(Civil) Nos. 13802-13805 of 2019
Judges: Deepak Gupta J., Surya Kant J.
Can a government authority reject a company’s tender based on the poor performance or adverse remarks against its sister concern? The Supreme Court of India recently addressed this question, clarifying the extent to which a company’s past performance, even through related entities, can impact its eligibility for future government contracts. The court upheld the decision of the tendering authority, emphasizing that the tendering authority is the best judge of its requirements.

Case Background

The case involves a tender process for two works at Kochi, with estimated costs of Rs. 53 crores and Rs. 72 crores respectively. “The Silppi Constructions Contractors” (referred to as “the firm”) submitted bids, but their technical bids were rejected on 28 March 2019. The firm appealed the rejection on the same day, but the appeals were rejected on 9 April 2019. The firm then filed a writ petition in the High Court of Kerala, arguing that no reasons were provided for the rejection of their tender or appeals. The respondents argued that the firm did not meet the eligibility criteria because a sister company, “M/s Silppi Realtors and Contractors Pvt. Ltd.” (referred to as “the sister company”), had adverse remarks against it regarding workload returns for the quarter ending September 2017. The respondents contended that the adverse remarks against the sister company justified rejecting the firm’s tender.

Timeline

Course of Proceedings

The learned single judge of the High Court allowed the writ petition, stating that the appellate order was not a speaking order and was therefore not legally sustainable. The single judge also held that adverse remarks against the sister company could not be used against the petitioner and that the remarks against the sister company were not justified. The respondents were directed to consider the financial bid of the petitioner. However, a division bench of the High Court allowed the writ appeals filed by the respondents and other tenderers. The division bench held that the scope of interference in contractual matters is very limited, that the single judge should not have interfered with the administrative decision regarding the sister company, and that the single judge could not have set aside the adverse remarks against the sister company in the writ petition filed by the firm. The division bench also noted that directing the tendering authorities to consider the financial bid of the petitioner meant that the technical bid of the petitioner was accepted.

Legal Framework

The court referred to Clause 1.19 of the Manual of Contracts, 2007, which defines “Related Firms.” Clause 1.19(a) states that in works contracts, business relationships are crucial, and contractors should disclose all Military Engineering Services (MES) registered contractors with whom they have business relationships, including sister concerns. Clause 1.19(c) specifies that a “business relationship” exists when one or more partners or directors are common between the firms. The court noted that the eligibility criteria for Military Engineering Services (MES) enlisted contractors require that they should not carry adverse remarks in Work Load Return (WLR) of competent engineer authority. For other contractors, they are required to meet the same criteria as “SS” MES contractors category a(i) and these contractors were specifically told that they could see enlistment criteria in the MES Manual Contracts.

Arguments

Petitioner’s Arguments:

• The petitioner argued that the Division Bench of the High Court erred in holding that the writ petition was not maintainable without making all the tenderers parties to the petition.
• The petitioner contended that the adverse remarks recorded against the sister company could not be considered without a challenge by the sister company itself.
• The petitioner submitted that the appellate orders were bad since they were without reasons.
• The petitioner argued that the extension of time granted to the sister company for a project in Chennai indicates that there were reasonable grounds for the extension, and this should not be a reason to reject the technical bid.
• The petitioner submitted that the dispute between the sister company and another party was referred to arbitration, and the arbitrator passed an award in favor of the sister company. Therefore, this issue should not be used against the petitioner.

Respondents’ Arguments:

• The respondents contended that the petitioner’s tenders were rejected since the petitioner did not satisfy the eligibility criteria for submission of the bid.
• The respondents argued that a sister concern of the petitioner’s firm had not renewed its enlistment and had adverse remarks against it in respect of workload return of ‘SS’ Class Contractors for the quarter ending September, 2017.
• The respondents submitted that since the adverse remarks had been given to the sister company, the petitioner firm could not be awarded the contract.
• The respondents argued that the adverse remarks against the sister company were valid, and the sister company had not challenged them.
• The respondents contended that the tendering authority is not required to give reasons for rejecting a tender, especially since these are purely administrative decisions in the realm of contract.
• The respondents argued that the sister company had a contract in Chennai zone but there was a huge delay in the execution of the project and in another contract awarded to the sister company, the sister company had failed to perform its part of the contract leading to cancellation thereof.

Innovativeness of the argument: The petitioner innovatively argued that since an arbitration award was passed in its favour, the issue of non-performance could not be used against it. The petitioner also argued that the extension of time granted to the sister company for a project in Chennai indicates that there were reasonable grounds for the extension, and this should not be a reason to reject the technical bid.

Issues Framed by the Supreme Court

The Supreme Court addressed the following issues:

1. Whether the writ petition was maintainable without making all the tenderers parties to the petition.
2. Whether adverse remarks recorded against the sister company could be considered in the absence of any challenge by the sister company.
3. Whether the appellate orders were bad since they were without reasons.
4. Whether the petitioner firm and the sister company are “Related Firms”, within the meaning of Clause 1.19 of the Manual of Contracts, 2007.
5. Whether the petitioner was eligible to submit the tender.

Treatment of the Issue by the Court

Authorities

Cases Considered by the Court:

• Tata Cellular vs. Union of India [1994] 6 SCC 651 – Supreme Court of India: This case was used to explain the principles of judicial review in government contracts, emphasizing restraint and limited interference.
• Raunaq International Ltd. vs. I.V.R. Construction Ltd. [1999] 1 SCC 492 – Supreme Court of India: The Court held that superior courts should not interfere in matters of tenders unless substantial public interest was involved or the transaction was mala fide.
• Air India Limited vs. Cochin International Airport Ltd. [2000] 2 SCC 617 – Supreme Court of India: This case stressed the need for overwhelming public interest to justify judicial intervention in contracts involving the State.
• Karnataka SIIDC Ltd. vs. Cavalet India Ltd. [2005] 4 SCC 456 – Supreme Court of India: The Court held that the High Court is not competent to decide the correctness of the sale affected by the Corporation.
• Master Marine Services (P) Ltd. vs. Metcalfe & Hodgkinson (P) Ltd. [2005] 6 SCC 138 – Supreme Court of India: This case stated that the Court should primarily concern itself with any infirmity in the decision-making process.
• B.S.N. Joshi & Sons Ltd. vs. Nair Coal Services Ltd. [2006] 11 SCC 548 – Supreme Court of India: The Court held that it is not always necessary that a contract be awarded to the lowest tenderer and the employer is the best judge.
• Jagdish Mandal vs. State of Orissa [2007] 14 SCC 517 – Supreme Court of India: This case clarified that judicial review is intended to prevent arbitrariness and mala fides, not to check if the decision is “sound.”
• Michigan Rubber (India) Ltd. vs. State of Karnataka & Ors. [2012] 8 SCC 216 – Supreme Court of India: The Court held that if the State acted reasonably, fairly, and in public interest, interference by the Court would be very restrictive.
• Afcons Infrastructure Ltd. vs. Nagpur Metro Rail Corporation Ltd. [2016] 16 SCC 818 – Supreme Court of India: This case stated that a mere disagreement with the decision-making process is not a reason for a constitutional Court to interfere.
• Montecarlo vs. NTPC Ltd. AIR 2016 SC 4946 – Supreme Court of India: The Court held that where a decision is manifestly in consonance with the language of the tender document, the court should follow the principle of restraint.
• Municipal Corporation, Ujjain and Another vs. BVG India Ltd. and Others [2018] 5 SCC 462 – Supreme Court of India: This case held that the authority concerned is in the best position to find out the best person or the best quotation.
• Caretel Infotech Limited vs. Hindustan Petroleum Corporation Limited and Others 2019 (6) SCALE 70 – Supreme Court of India: The Court observed that a writ petition under Article 226 of the Constitution of India was maintainable only in view of government and public sector enterprises venturing into economic activities.

Legal Provisions Considered by the Court:

• Clause 1.19 of the Manual of Contracts, 2007: This clause defines “Related Firms” and was central to the court’s decision on whether the adverse remarks against the sister company could be used against the petitioner.
• Article 12 of the Constitution of India: The court referred to this article to emphasize that bodies which are State within the meaning of Article 12 are bound to act fairly and are amenable to the writ jurisdiction of superior courts.
• The Companies Act, 1956: The court referred to this act to emphasize that only companies incorporated under the Companies Act, 1956, are eligible to be enlisted as ‘SS’ Class Contractors.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Supreme Court relied on Tata Cellular vs. Union of India [1994] 6 SCC 651* to emphasize the principle of judicial restraint in administrative action, stating that the court does not sit as a court of appeal but merely reviews the manner in which the decision was made.
• The Court cited Raunaq International Ltd. vs. I.V.R. Construction Ltd. [1999] 1 SCC 492* to underscore that superior courts should not interfere in matters of tenders unless substantial public interest is involved or the transaction is mala fide.
• The Court referred to Air India Limited vs. Cochin International Airport Ltd. [2000] 2 SCC 617* to stress the need for overwhelming public interest to justify judicial intervention in contracts involving the State and its instrumentalities.
• The Court cited Karnataka SIIDC Ltd. vs. Cavalet India Ltd. [2005] 4 SCC 456* to state that the High Court exercising its power under Article 226 of the Constitution is not competent to decide the correctness of the sale affected by the Corporation.
• The Court relied on Master Marine Services (P) Ltd. vs. Metcalfe & Hodgkinson (P) Ltd. [2005] 6 SCC 138* to highlight that while exercising power of judicial review in respect of contracts, the Court should concern itself primarily with the question, whether there has been any infirmity in the decision-making process.
• The Court cited B.S.N. Joshi & Sons Ltd. vs. Nair Coal Services Ltd. [2006] 11 SCC 548* to state that it is not always necessary that a contract be awarded to the lowest tenderer and it must be kept in mind that the employer is the best judge therefor.
• The Court referred to Jagdish Mandal vs. State of Orissa [2007] 14 SCC 517* to explain that judicial review of administrative action is intended to prevent arbitrariness, irrationality, unreasonableness, bias and mala fides.
• The Court cited Michigan Rubber (India) Ltd. vs. State of Karnataka & Ors. [2012] 8 SCC 216* to state that if State or its instrumentalities acted reasonably, fairly and in public interest in awarding contract, interference by Court would be very restrictive.
• The Court relied on Afcons Infrastructure Ltd. vs. Nagpur Metro Rail Corporation Ltd. [2016] 16 SCC 818* to state that a mere disagreement with the decision-making process or the decision of the administrative authority is no reason for a constitutional Court to interfere.
• The Court cited Montecarlo vs. NTPC Ltd. AIR 2016 SC 4946* to state that where a decision is taken that is manifestly in consonance with the language of the tender document or sub-serves the purpose for which the tender is floated, the court should follow the principle of restraint.
• The Court referred to Municipal Corporation, Ujjain and Another vs. BVG India Ltd. and Others [2018] 5 SCC 462* to state that the authority concerned is in the best position to find out the best person or the best quotation depending on the work to be entrusted under the contract.
• The Court cited Caretel Infotech Limited vs. Hindustan Petroleum Corporation Limited and Others 2019 (6) SCALE 70* to observe that a writ petition under Article 226 of the Constitution of India was maintainable only in view of government and public sector enterprises venturing into economic activities.
• The Court used Clause 1.19 of the Manual of Contracts, 2007 to determine that the petitioner firm and the sister company were related firms.
• The Court referred to Article 12 of the Constitution of India to emphasize that bodies which are State within the meaning of Article 12 are bound to act fairly and are amenable to the writ jurisdiction of superior courts.
• The Court referred to The Companies Act, 1956 to emphasize that only companies incorporated under the Companies Act, 1956, are eligible to be enlisted as ‘SS’ Class Contractors.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to maintain judicial restraint in contractual matters, especially those involving technical issues. The Court emphasized that the tendering authority is the best judge of its requirements and that courts should not interfere unless there is clear evidence of arbitrariness, mala fides, or irrationality. The Court also considered the fact that the petitioner firm and the sister company were related entities, and adverse remarks against the sister company could be used against the petitioner firm. The court also considered that the sister company had not got its enlistment renewed and had not represented against the adverse remarks. The Court also found that the petitioner was not eligible to submit the tender.

Logical Reasoning:

The Court observed that the High Court should have exercised restraint and should not have interfered with the administrative decision of the tendering authority. The Court emphasized that the tendering authority is the best judge of its requirements and that courts should not interfere unless there is clear evidence of arbitrariness, mala fides, or irrationality. The Court also considered the fact that the petitioner firm and the sister company were related entities, and adverse remarks against the sister company could be used against the petitioner firm. The court also considered that the sister company had not got its enlistment renewed and had not represented against the adverse remarks. The Court also found that the petitioner was not eligible to submit the tender.

Ratio Decidendi

The ratio decidendi of the judgment is that courts should exercise judicial restraint in contractual matters, especially those involving tenders. The tendering authority is the best judge of its requirements, and courts should not interfere unless there is clear evidence of arbitrariness, mala fides, or irrationality. Additionally, adverse remarks against a related company can be considered in the evaluation of a tender, provided the related companies meet the definition of “related firms” as defined in the relevant manuals.

Obiter Dicta

The obiter dicta in this case include the observations that:

• While rejecting a tender, the person or authority inviting the tenders is not required to give reasons, even if it is a state within the meaning of Article 12 of the Constitution.
• Merely because an extension of time has been granted to a contractor, it does not mean that the Department has come to the conclusion that the contractor is not at fault.
• If the tendering authority is using any adverse material of the sister company against the petitioner firm, then the petitioner firm would be entitled to urge that the adverse remarks are not called for or that the adverse remarks are not justified or that the adverse remarks cannot be taken into consideration while considering the tender of the petitioner firm.

Conclusion

The Supreme Court’s decision in this case reinforces the principle of judicial restraint in contractual matters, especially those involving tenders. The Court upheld the tendering authority’s decision to reject the petitioner’s tender based on adverse remarks against its sister company. This judgment clarifies that a company’s past performance, even through related entities, can impact its eligibility for future government contracts. The Court emphasized that the tendering authority is the best judge of its requirements and that courts should not interfere unless there is clear evidence of arbitrariness, mala fides, or irrationality. The Court also provided guidance on the use of adverse remarks against related firms, the requirement for reasoned orders in tender rejections, and the eligibility criteria for contractors.

Implications

The implications of this judgment are significant for government contracts and related companies:

• Judicial Restraint: The judgment reinforces the principle of judicial restraint in contractual matters, emphasizing that courts should not interfere with administrative decisions unless there is clear evidence of arbitrariness, mala fides, or irrationality.
• Tendering Authority’s Discretion: The judgment underscores that the tendering authority is the best judge of its requirements and that courts should not second-guess their decisions unless they are clearly unreasonable.
• Related Companies: The judgment clarifies that adverse remarks against a related company can be considered in the evaluation of a tender, provided the related companies meet the definition of “related firms” as defined in the relevant manuals. This means that companies cannot avoid the consequences of poor performance by operating through related entities.
• Eligibility Criteria: The judgment highlights the importance of meeting eligibility criteria for government contracts and that only companies incorporated under the Companies Act, 1956, are eligible to be enlisted as ‘SS’ Class Contractors.
• Reasoned Orders: The judgment clarifies that while rejecting a tender, the person or authority inviting the tenders is not required to give reasons, even if it is a state within the meaning of Article 12 of the Constitution.
• Contractor Performance: The judgment emphasizes that past performance, even through related entities, can impact a company’s eligibility for future government contracts. This means that companies need to maintain a good track record to be considered for government projects.

In conclusion, this judgment serves as a reminder that government contracts are subject to a high degree of scrutiny and that companies must adhere to all eligibility criteria and maintain a good track record. It also emphasizes the importance of judicial restraint in contractual matters and the tendering authority’s discretion in evaluating tenders.